How to Trade Oil Profitably in the Current World Situation

At the moment, the oil market appears to be in something of a state of turmoil.  There are certain forces at play that will push prices up for the foreseeable future; yet recent events have created a situation that could have a dampening effect on prices, at least in the short to medium term.

Market Analysis

On the demand side, large economies, such as India and China, are still growing strongly.  If this trend continues, it will ensure constant growth in the demand for oil in the short to medium term.  On the other hand, economic activity in many important Western economies is still lacklustre.  Despite several predictions of an imminent upturn, the US and UK economies have not lived up to expectations, which will, to a large extent, keep demand for oil in check.  The upcoming summer months in the northern hemisphere will also act to keep demand for oil within reasonable limits during that period.

A number of countries have suffered crippling natural disasters in the past few months.  The earthquake and subsequent tsunami in Japan was no doubt the worst of these and has now raised fears of a recession in one of the world’s biggest economies.  Once the focus shifts from immediate need to rebuilding, the construction industry in Japan will no doubt receive a huge boost.  This will, in turn, lead to stronger demand for various imported commodities and stimulate economic activity, and the demand for oil will increase.

The latest unrest in various oil producing countries of the Middle East/North Africa (MENA) region has created fear of disruption to the oil supplies.  This situation has been exacerbated by recent developments in Libya, where a civil war could potentially break out after military intervention by Western powers.  This will lead to further upward pressure on the price of oil.

Something else that has to be taken into account is that the threat of a nuclear disaster in Japan has made many nuclear powers rethink their approach towards this form of energy.  Germany, for example, has already decided to close several of its older nuclear power stations.

Since nuclear energy is an alternative to oil, any development that curtails the supply of this alternative energy source will, in the long run, act to stimulate the demand for oil and push the price up even further.

What we will probably see in the short to medium term therefore, is a temporary lull in the demand for oil.  In the medium to long term, everything points to higher oil prices and it would not be surprising to see new record prices within the next two years.

Technical Analysis

Technical analysis of the situation seems to confirm the foregoing conclusions.  The market was in a strong bull run before the earthquake in Japan on 11^th March 2011, but since then there has been a significant price correction, because many traders feared an imminent recession in Japan.  The market reached a low on the 15^th of March, with Brent Oil closing at 108.28 – see fig. 3.21.

At its lowest level, the price moved marginally below the Kijun Sen (the blue line) on the Ichimoku Kinko Hyo, but rebounded sharply from there and right now it is trading above both the blue line (Kijun Sen) and the shorter-term average, the Tenkan Sen (the red line).

Trading the Current Oil Market

The Ichimoku Kinko Hyo currently indicates a clear bull market.  The Chinkou Span (the green line) is above the price of 21 days ago; the price is well above the cloud and also above both the blue and red lines of the Kijun Sen and Tenkan Sen.

A possible trading strategy is therefore to buy Brent with a stop loss placed at the red Tenkan Sen line.  Along with the Ichimoku Kinko Hyo, this line always acts as your first level of support.  Once the price breaks through the blue Kijun Sen, a long position is no longer advised.

The first resistance level is at 118.47, which was reached on 7^th March.  Once the price breaks through that level, watch out for 119.40, a previous high that was reached on 24^th February.  If the price breaks through this level, new highs are very possible.

As long as the price is above the cloud of the Ichimoku Hyo, medium term short trades cannot be advised.  This does not mean, however, that an astute day trader cannot make money from short-term corrections in the price.  In this instance, figure 3.21 should be redrawn using an hourly or even shorter-term chart.  The same rule applies when the price is trading above the cloud; take in a long-term position.  When it is in the cloud, stay out of the market and when it trades below the cloud, it is time to go short. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Confidence in the Eurozone shaky at best

Dean Wright ,Senior Analyst ,Fxknight.com


The Euro continued to fall during the week amid fears that the Euro zone as the markets increasingly loose confidence in the member country’s ability to contain the Fiscal debt crises spreading to vulnerable economies such a Spain and Portugal.

The Spanish Prime minister has defiantly stated that there will be no bailout for Spain warning “those investors who are short selling Spain are going to be wrong” Meanwhile the cost of borrowing has risen for Spain showing just where the market’s confidence currently lies.

The bailout package for Ireland is expected to be released today which will outline how much and in what form the Irish government will pay back the loan in an effort to calm the markets. However the simple fact that Ireland needs this loan was enough to raise the worries of the stability of the economic community with Europe.

This will have a negative effect the on the price of Europe as investors fears that the debt crises in Greece throughout Europe is slowly being realised.

Dean Wright

Senior Analyst

Fxknight.com

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

Combining Technical and Fundamental Analysis

Technical analysis is a strong instrument in the trader’s tool kit and, in fact, many investors argue that it is the most important form of research.

Nevertheless, when a single tool has such a material impact on your decision making process it is worth appreciating its assumptions and potential limitations.

Stock Market Models

The validity of technical analysis is based on behavioural finance which studies how social, cognitive and emotional biases affect the price movements of the stock markets.

The two main observations from behavioral finance are:

1) Investors tend to make systematic errors that affect the market and take away the advantages of market efficiency

2) Traders can fail to materialise a loss and, although all indicators show that the market will continue to trend against them, they make the irrational decision to hold their position and hence incur even greater losses

A contrasting model for stock market movement is the ‘Efficient Market Hypothesis’ (EMH) which states that the price of a stock at any given moment represents a rational evaluation of all the known information.

The EMH model has at least two interesting consequences:

1) The return on equity can be expected to be slightly greater than that available from non-equity investments. If this was not the case then the same rational calculations would lead equity investors to shift their funds to these safer non-equity investments that could be expected to give the same or better return at a lower risk level

2) Because the price of a share at every given moment is an ‘efficient’ reflection of expected value the curve of expected return prices will tend to follow a ‘random walk’. This will be determined by the random emergence of information over time

Combining Technical and Fundamental Analysis

So, how can such models be used in order to make more informed trading decisions?

When entering into a position it is important to understand the market paradigm at the time of the decision with respect to the most relevant economic indicators. For example, if an investor is trading the GBP/USD spread betting market then they should record the current situation and expectations for both economies. 

Below is an example of how an investor might combine technical and fundamental analysis when considering a position on the GBP/USD market. In this case the investor is making use of a daily chart:

Technical Summary:

-          GBP has been gaining against the USD since May of this year and is supported by a firm rising trend line

-          The 20 days EMA is above the 50 days EMA which supports the bullish view

-          MACD (12,26,9) is above 0 and seems to be consolidating with its signal line which may be just another corrective movement in a bull market

-          RSI (14) is neutral

-          Stochastic (28,6,6) is showing signs of bullish divergence

-          Summary: The investor could decide to go long above $1.595 with targets of $1.63 and $1.65

Fundamental Summary:

	US		UK
Lagging Indicators	Recent Releases	Consensus For Next Release	Recent Releases	Consensus For Next Release
Employment	9.7%, 9.6% (MOM)	9.6%	7.6%	7.6%
Overnight Interest Rates	1.0%	1.0%	0.5%	0.5%
GDP	1.8%, 2.0%	2.1%	1.2%, 0.8% (QOQ)	0.8%
CPI	1.0%, 1.1%	1.0%	0.5%, 0.0%  (MOM)	0.2%

The above table/fundamental summary is just a glance at some of the main figures, there are other key indicators that could be included such as money supply, consumer sentiment and building permits. It is also important to take into account the overall fiscal and monetary policy of the central banks and governments involved.

If we try to summarise both forms of analysis, we can observe a consolidating bullish trend combined with a divergence in monetary policies where the US is expanding and UK is pushing for austerity.

So, an investor may decide to take a bullish view on the GBP/USD market and watch out for any changes in the current market paradigm. As long as the new information is inline with consensus, it might be expected that the technical trend will continue to be sustained. Any new information that challenges current expectations could manifest in an adverse reaction on the currency pair.

The above regime may sound like laborious work, however, in my experience, most retail traders do not seem to have the discipline to follow such analysis. On the other hand, it is a known fact that most retail traders are net losers so it might be worth putting in the extra effort.

Good luck and happy trading 

Shai Heffetz 



Spread betting carries a high level of risk and you can lose more than your initial deposit, so you should ensure spread betting meets your investment objectives. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

BP - Did they really lose 35% otheir value in just over a month ?

Warren Buffet once said - "Be Fearful When Others Are Greedy And Greedy When Others Are Fearful".

If you ask today most people if they are willing to buy BP (BP.L) shares they will give you a dirty look and kindly advise you to check in with at the closest mental health clinic. Most people are not what we would consider successful in  their investment they will usually buy a stock near the pick and sell around the bottom.

The reason for that are simple, we humans are driven by our emotions fear and greed. I would suggest for you to take a close look at BP's financial and think again if their current share price is justified or is it just that people are scared.

Let's look at the facts :

- BP's earning for 2009 amounted to over $243B ,their net income was $16.5B

- Their average net income for the past 5 years has been $21B

- Current Market cap is $122B which means a multiplier of 0.5 on earning and 4.5 on net income.

Let’s assume that the cost for BP to fix the problem and clean the bay will reach $1B and law suits that will take years to resolve will cost them another $1B . So over the next couple of years it means a 5% reduction in net income. Does that justify a 36% drop in share price ?

Another approach would be run a technical analysis exercise on their chart.

Share price dropped 36% since the beginning of the crisis forming a triple bottom together with October 08' and March 09' ,each time the bottom seems to inch a bit higher than the previous one. BP has held on to the 400p support twice in the last 2 years.

Let us assume that the BP is in a bearish channel we know that for every action there is a reaction ,Fibonacci retracement provide us with use useful clues on the target price for the corrective move.

The 23.60% the closest line which is the minimum and stand @ 471p  ,the 38% is @ 507 and the 50% which will determine the overall direction of the  trend is  far away at 536p.

I am not in any way advising if one should speculate on the movement just take a look at the facts and decide for your self.

Shai Heffetz
Head of InterTrader.com

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.